Ukraine

The landmark Surgeon General’s Report on Smoking and Health, issued by U.S. Surgeon General Dr. Luther Terry in 1964, represented the first time that a government report linked smoking and ill health, including lung cancer and heart disease. The scientific evidence accumulated over the past five decades has helped us understand how tobacco use imposes a heavy health and economic burden across countries.

Action to curb tobacco use makes solid economic sense, given the high costs of tobacco-related illnesses and premature death and disability among adults in their most productive years. Smoking harms health, incomes, earning potential, and labor productivity. Smoking also undermines human capital development —a critical factor for inclusive economic and social development.

Raising tobacco taxation commensurate with affordability levels is proven to be the most effective measure to curve consumption. Tax increases are most effective in countries where the social acceptability of smoking is reduced by curtailing smoking in public places and educating the population about its negative health impact.

Contrary to the assumption that tobacco taxes are regressive, the results of recent studies done in Chile and the United States show that the benefits of this policy measured in terms of lower medical expenses and an increase in working years outweighs any relative increase in tobacco prices, largely benefitting the poor more than the rich.

Over the past decade, the World Bank Group (WBG), in partnership with the Bill & Melinda Gates Foundation and the Bloomberg Foundation, and in coordination other organizations, such as WHO, has expanded its tobacco taxation work globally to assist countries implement their public health and domestic resource mobilization efforts. Simultaneously, technical assistance is being provided to strengthen countries’ legal and regulatory capacity to control illicit tobacco trade. Support is also being provided to facilitate knowledge-sharing, building upon existing platforms such as the Joint Learning Network (JLN).

The experience of Philippines over 2012-2016 is one of the most compelling examples of ambitious national tobacco tax reform. It involved a fundamental restructuring of the country’s tobacco excise tax structure, including reduction in the number of tax tiers; indexation of tax rates to inflation; and substantial tax increases which expanded the fiscal space to fund the increase in the number of families enrolled in the health insurance scheme from 5.2 million primary members in 2012 to 15.3 million in 2015.

More recently, national governments in several countries have adopted significant tobacco tax reforms to improve public health and mobilize domestic resources, covering a total population of 200 million people. In the Ukraine, the 2017 budget includes a 40% excise tax increase on tobacco products, above the 2016 level, while maintaining a 12% ad valorem tax. It is estimated that that this measure will increase on average the excise tax burden as a share of the retail price of a pack of cigarettes from 41% in 2016 to 46% in 2017, while consumption is expected to decrease by 10%. To get a sense of the magnitude of health gains likely to result from the adoption of these tax increases, modeling work estimated that, by 2035, Ukraine’s recent tobacco tax increases will prevent 126,730 new cases of smoking-related disease; 29,172 premature deaths; and 267,098 potential years of life lost, relative to no change in tax. These reductions in disease and death are estimated to result in significant healthcare costs avoided.

As part of broad fiscal reforms approved by Colombia’s Congress, new taxes on tobacco products will nearly triple prices over 2017-2018, with annual adjustments for inflation and a mandated specific increase in subsequent years. Likewise, in Moldova, the average excise tax burden on a pack of cigarettes will increase from 39% in 2016 to 45% in 2017.

Following the introduction of the new tax regime in 2017, Armenia’s tobacco excise tax burden will double, increasing to 62% of the average retail price by 2020. In the case of Armenia and Colombia, tobacco taxation increases are part of larger tax system reforms that were included under fiscal consolidation programs.

In moving forward this agenda, we have to be clear that to be effective and sustainable, the design of tobacco tax reforms has to be grounded on a good understanding of how public policy is created and implemented in a country, including the social forces which could support or hinder the passage of strong anti-tobacco measures. We also have to be mindful that the adoption of tobacco tax reforms could be greatly facilitated if they are included as part of broad fiscal consolidation programs as shown by the recent experience in Armenia and Colombia, or as part of the formulation of annual government budgets as shown by the experience in Moldova and Ukraine.

Ukraine recently joined the global campaign Big Tobacco Tiny Targets through research led by the Institute for Global Tobacco Control at the Johns Hopkins Bloomberg School of Public Health and the NGO, Advocacy Center LIFE.

During the research 102 schools were monitored within a 250-metre radius.

The research found:

81 percent (376 out of 460 points of sale) of supermarkets, convenience stores and kiosks sold tobacco products;

96 percent of these used aggressive marketing displays, putting tobacco products in or near the cashier zone and next to sweets and snacks where children could easily see them;

Advocacy Center LIFE Chairman Andriy Skipalskyi said Ukraine had made tremendous progress implementing different tobacco control measures, but more needs to be done concerning children and tobacco.

“Our next step is to limit the tobacco accessibility particularly for children. Hence, the adoption of the display ban and implementation of Articles 9, 10, 11, and Guidelines, of the WHO FCTC into Ukrainian legislation are crucial for countering the tobacco industry marketing of deadly products to children.”

– See more at: http://www.fctc.org/fca-news/opinion-pieces/1455-big-tobacco-hooking-kids-in-ukraine#sthash.Pgm28YBi.dpuf

The Verkhovna Rada has failed at first reading to adopt a bill providing criminal responsibility for tobacco and alcohol smuggling.

The parliament did not collect the required number of votes (226). As a result, MPs sent the bill on amendments to Article 201 of the Criminal Code, related to criminalization of alcohol and tobacco smuggling through the customs border without customs control or with concealment from customs control (bill No. 3254), to the relevant committee for revision.

The bill proposes defining as a crime movement of alcoholic drinks and tobacco products through the customs border without customs control or with concealment from customs control on a large scale

In particular, such smuggling is punishable by imprisonment for a term of three to seven years with confiscation of contraband, as well as goods, vehicles with specially arranged hiding places used for transfer through the customs border of Ukraine avoiding customs control.

The smuggling of these products in large amounts is punishable by imprisonment for a term of five to ten years with confiscation of contraband, as well as goods vehicles with specially arranged hiding places used for transfer through the customs border of Ukraine avoiding customs control.

The smuggling of these products in a very large scale is punishable by imprisonment for a term of eight to 20 years with confiscation of contraband, as well as goods, vehicles with specially arranged hiding places used for transfer through the customs border of Ukraine avoiding customs control.

Ukrainian officials appear to be lobbying on the side of the tobacco industry once again.

On Oct. 5, the Ministry of Finance proposed a 40 percent tax increase on cigarettes – bringing the price in line with inflation, like any other consumer product.

The parliamentary tax and customs committee, however, has countered the ministry’s proposal, arguing for a 20 percent increase – about half of the official inflation rate.

In other words, such a small increase will effectively make Ukraine’s cheap cigarettes even cheaper, which spurs smoking. Nearly 100,000 people die prematurely each year in Ukraine from smoking-related diseases.

The sharp currency devaluation – in which the Ukrainian hryvnia has lost two-thirds of its value in two years – has allowed lawmakers to promote a tax decrease as a tax hike.

In 2014, tobacco companies paid taxes of Hr 240 per 1,000 cigarettes and in 2015, this rose to Hr 300, according to a video released by industry expert Konstantin Krasovsky on Dec. 7.

The average exchange rate in 2014 was Hr 12/$1; thus far in 2015 it has been Hr 22/$1. This means the tax amounted to $20 per 1,000 cigarettes in 2014 compared with $13.6 in 2015.

Therefore, if the increase in 2016 is only 20 percent, $15.1 will be paid per 1,000 cigarettes at the current exchange rate of 23.75; for the 40 percent hike, the tax reaches $17.7 – raising the price of a cigarette pack by Hr 5 to Hr 8, or merely $0.21-$0.29.

Ukraine has some of the cheapest, lowest-taxed cigarettes in Europe, fueling illegal smuggling and contributing to higher smoking rates, poor health and early death.

“As a comparison, bread has seen a 70 percent price increase whereas cigarettes have only seen a 20 percent price increase. Therefore cigarettes have become more affordable,” said Andrey Skipalskyi, president of the Ukrainian Center for Tobacco Control. “A 40 percent (tax increase) is already a compromise and doesn’t include the real price increase.”

In his video, Krasovsky argues that if the excise tax increases by 40 percent, annual revenues to the state budget will increase by Hr 7 billion – a figure he based on a 10 percent decline in the number of smokers. But if parliament decides on a 20 percent increase, the budget will receive Hr 4 billion, a figure which relies on demand remaining the same.

The tobacco industry is famous for its underhanded lobbying tactics.

One of the difficulties for anti-tobacco groups is that there is no definition of lobbying in Ukrainian law.

“You can’t track the money or the members of parliament being paid…So what we do is monitor their statements and if someone is overtly pro-tobacco we shame them by calling them tobacco lobbyists,” said Skipalskyi.

According to Skipalskyi, the tobacco companies in Ukraine in recent years have fought hard against any increases in taxation. Higher taxes on cigarettes have been proven to be very effective in getting smokers to quit and preventing people from even starting.

Skipalskyi said the tobacco industry is on good terms with parliament’s tax committee head, Nina Yuzhanina, a member of the Bloc of President Petro Poroshenko, who defends her position as “pro-business,” according to Krasovsky and Roman Nasirov, her predecessor who is now head of State Fiscal Services.

Nasirov has argued against sharp tax increases on cigarettes , saying they will exacerbate Ukraine’s problem with illicit trade. But anti-tobacco groups accuse Nasirov and other officials of using this as an excuse.

“Every year they keep repeating the same mantra that it would increase illicit trade…It’s very important to separate illicit trade and tax policy. It’s up to the customs officials to police illicit trade on both sides. In Ukraine and in Poland,” said Skipalskyi.

Likewise Krasovsky pointed out that the problem with illicit trade is with cigarettes manufactured in Ukraine, not cigarettes coming from abroad.

An investigation conducted by investigative journalist Vlad Lavrov in 2009 asserted that the cigarette manufacturers in Ukraine are complicit in the illicit trade – estimated to be worth $2.1 billion a year. The investigation found that manufacturers produce a 30 billion cigarette surplus because of the country’s cheap production costs, which they then sell to smugglers at the same price as to a legal wholesaler.

Skipalskyi told the Kyiv Post that only the introduction of expensive tracking systems would allow customs officials to trace cigarettes back to a particular factory.

Japanese Tobacco Incorporated, Philip Morris and British American Tobacco, three of the four biggest manufacturers in Ukraine, said they only sold to licensed distributors.

The Ukrainian budget has benefitted significantly from tax increases on cigarettes. Between 2008 and 2015, the tax on cigarettes increased almost 10 times — from Hr 29 to Hr 300 – and state revenue increased from Hr 3.6 million to Hr 18.1 million.

Besides the revenue boost, higher cigarette taxes improve public health. As prices rose, according to Ukrainian State Statistic Service, the number of smokers in Ukraine decreased from 10.1 to 7.7 million people.

“The question of tax increases is painful one. However, from the point of view of the country’s health, I can’t not talk about it, because in every country excise tax policy is considered together with the health policy of the country. Because money from our budget also goes to health care,” said Jaresko.

This is a big step according to Skipalskyi: “Before Jaresko, I had never heard a minister view taxes in terms of health benefits.”

Krasovsky, a veteran anti-tobacco activist, said the government’s position is more important than that of parliament committees when lawmakers vote. Tobacco companies are producing more now in anticipation that the tax will go up next year, Krasovsky said, so Ukraine’s state budget won’t see benefits right away.

While Japan Tobacco International did not comment, Philip Morris and British American Tobacco said that tax increases should be gradual and take consumer income into account.

Lozhkin openly supports the Russian tobacco company Megapolis, which monopolized 90 percent of tobacco product sales in Ukraine under former President Viktor Yanukovych. Megapolis under Yanukovych managed to monopolize cigarette sales on the Ukrainian market. The company signed longterm contracts for almost all products produced in Ukraine by the so-called “Big Four” – British American Tobacco, Japan Tobacco, Inc., Imperial Tobacco Group and Philip Morris.

Megapolis sells to large and small retailers, taking a large part of the profit. Megapolis behaves in the same way monopolistic companies in the United States did during the 20th century before anti-trust laws were passed. Retail chains which do not agree with its draconian terms are shut out of the market altogether. It’s not possible on the Ukrainian market to purchase cigarettes directly from producers, according to contracts which grant Megapolis exclusive sales rights.

The Ukrainian distributor Megapolis is a subsidiary of the Russian distributor Megapolis, which controls 70 percent of the Russian tobacco market. According to Forbes, the principal owners of the group are Igor and Sergei Kesaev.

In 2013 they sold a 40 percent share in the international cigarette companies Japan Tobacco, Inc. and Philip Morris International for 1.5 billion USD. According to Forbes, a portion of the sale receipts were invested in weapons production companies and notes that this includes the “principle owner” of the Degtyarev factory which produces automatic Kalashnikov firearms (AK-47 through AK-103).

“The tobacco market is the fourth largest taxpayer and its influence on the country’s economy and domestic market is enormous.”

At the same time, when the entire world is imposing sanctions against Russia, a Russian company is exacting monopolist rent on the Ukrainian market. In addition, proceeds are directly funneled to a weapons producing Russian company, which directly supports pro-Russian separatists in an armed conflict in east Ukraine.

The interests of Megapolis in Ukraine’s political world are represented by Boris Kaufman, who has on numerous occasions been linked to the Ukraine’s Presidential Administration chief Boris Lozhkin.

Ukrainian media on several occasions earlier reported on ties between Megapolis and Yanukovych family members.

It is worth noting that the Austrian bank account of Boris Lozhkin was frozen last month. Some 130 million USD had been deposited in the account from fugitive Ukrainian oligarch Serhiy Kurchenko.

Many people in Ukraine connect the fact that even after the victory of the democratic revolution in Ukraine two years ago there continues to exist a monopoly created by Russian traders of weapons with the Ukrainian partner Megapolis represented by businessman Boris Kaufman. It was namely Kaufman who was able under the previous administration to arrange protection from the family of the former president Yanukovych and with Lozhkin when he became the head of the new Presidential Administration.

Hopefully the monopolist control of the Russian company on the Ukrainian tobacco market will serve as the basis for a serious investigation by the Ukrainian Anti-Monopoly Committee and that top Ukrainian bureaucrats supporting the scheme are punished

Ukraine has dropped a lawsuit against Australia over its plain-packaging tobacco laws, according to the World Trade Organisation. The Eastern European country has suspended the legal proceedings it launched against Australia through the World Trade Organisation (WTO) in 2012 which claimed the laws were trade-restrictive. Instead, Ukraine has told a WTO panel of adjudicators they hope to find a mutually agreed solution with Australia.

Ukraine was the first of five countries to challenge Australia’s laws at the WTO, even though it does not export tobacco to Australia. Health campaigners were perplexed by Ukraine’s lawsuit because it is also a party to the United Nation’s Framework Convention on Tobacco Control and backed guidelines on how to implement the treaty, including enforcing plain packaging. British American Tobacco has previously said it was helping meet Ukraine’s legal costs in the case against Australia, with individual companies unable to pursue litigation via the WTO. There was no indication lawsuits would be dropped by the other countries challenging Australia’s laws — Indonesia, Cuba, Honduras and Dominican Republic.

The countries say Australia’s strict tobacco packaging laws, which ban flashy logos and distinctive-coloured cigarette packaging in favour of plain olive packets with brand names printed in small standardised fonts, infringe trademarks and constitute illegal barriers to trade. But a growing number of countries have said they plan to follow Australia’s 2010 step, and public health advocates said standardised packaging heralds a new era of tobacco control

If Australia wins the legal battle, the effects could be felt beyond the tobacco industry with supporters and opponents pointing out similar rules could be imposed on junk food and alcohol. Under WTO rules, Ukraine’s suspension could last 12 months, after which its right to return to the panel proceedings will lapse. The WTO adjudication panel has previously said it expected to rule on the tobacco lawsuits against Australia in the first half of next year.

The following communication, dated 2 June 2015, addressed to the Dispute Settlement Body (DSB), is circulated in accordance with Article 12.12 of the Dispute Settlement Understanding (DSU) .

On 28 May 2015, the Panel received a request from Ukraine to suspend the proceedings in Australia – Certain Measures concerning Trademarks and other Plain Packaging Requirements Applicable to Tobacco Products and Packaging (WT/DS434) pursuant to Article 12.12 of the Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU) . In a letter dated 29 May 2015, Australia indicated that it “supports the request by Ukraine to suspend proceedings, on the basis that, as Ukraine has said in its letter, the suspension will be ‘with a view to finding a mutually agreed solution'”.

Article 12.12 of the DSU provides that the Panel may suspend its work at any time at the request of the complaining party for a period not exceeding 12 months. This provision also indicates that if the work of the Panel has been suspended for more than 12 months, the authority for establishment of the Panel shall lapse.

The Panel hereby informs the Dispute Settlement Body of its decision of 29 May 2015 to grant Ukraine’s request and suspend its work and requests that this communication be circulated to Members.